Feds Arrest Three Suspects on Counterfeit Components Charges

On October 8, the federal government arrested three people in Southern California on suspicion of selling counterfeit integrated circuits (ICs) used in the manufacture of electronic devices to the U.S. Navy. The government executed search warrants at three business locations, two residences, and a storage facility in California alleged to be connected to the case.

An 11-count indictment was unsealed on October 8, 2009, charging Mustafa Abdul Aljaff, 29; his sister, Marwah Felahy, 32; and her husband, Neil Felahy, 32, all of Newport Coast, California, with conspiracy, trafficking in counterfeit goods or services, and mail fraud, in connection with their sale of counterfeit integrated circuits to the U.S. Navy.

The parts in question had been falsely marked as being of “military grade,” an indication that a part has undergone more extensive testing than the “commerical” version of the same part. Higher grade parts, including military-grade integrated circuits, are sold to the aerospace, medical device, and the U.S. military at a higher price than commercial-grade parts because of the special manufacture and testing required. Such parts are used in equipment where component failure could cost lives.

As mentioned in a Quality Digest Daily news item “SAE Standard to Thwart Counterfeit Aerospace Electronics [1]” the influx of counterfeit ICs has become a big problem for the aerospace and defense industries. The huge demand for consumer electronics has lead IC manufacturers to concentrate their efforts on producing consumer-grade parts rather than military-grade. In addition, because consumer products have a much shorter life span than say, a jet aircraft, the components that go into those products quickly become obsolete and in short supply.

“One of the problems that the aerospace and defense companies have is that the demand for [military standard parts] is extremely small compared to the demand for electronic parts for commercial applications,” says Phil Zulueta, chair for SAE's Counterfeit Electronic Parts Committee. “Another issue is that after a time, a component manufacturer will decide that it isn't worth keeping a product line open and they stop producing that part, and that particular part might have been designed into a military system. So although you had hoped to be able to order parts to do repairs on aircraft, etc., the part is no longer available. This creates a demand for hard-to-find parts and the counterfeiters know this.”

As the demand for mil-grade parts has overrun the supply, a cottage industry in counterfeit parts has burgeoned. The counterfeit parts often come from China, according to the SAE, where lower-rade parts are remarked as being of higher grade. The process is referred to as “blacktopping” and involves scraping, sanding, or grinding off the original IC markings, and remarking them.

What makes the Southern California case so unusual is that the blacktopping was done in the United States rather than overseas.

“That is the first time we have found something of this scale right in our own back yard," says Zulueta. “This is normally done outside the country.”

According to the indictment, the defendants engaged in the interstate trafficking of counterfeit ICs in a variety of ways. They acquired ICs from China, imported them into the United States, and sold them online. They also obtained trademark-branded integrated circuits from unknown sources, and then blacktopped them with another trademark, thereby fraudulently indicating, among other things, that the devices were of a certain brand, were newer, of higher quality, or of military grade.

In March, June, and July of 2009 the defendants entered into contracts with the U.S. Navy and other government agencies for the sale of integrated circuits, according to the indictment. The defendants then shipped parts bearing false, counterfeit trademarks to the Navy. They are also alleged to have imported about 13,073 ICs bearing counterfeit trade marks, including military-grade markings from China and Hong Kong. The ICs were valued at approximately $140,835.

"Contract fraud—in this case, product substitution involving counterfeit microchips—presents a security and safety risk to our sailors and marines," says Sandy Macisaac, special agent in charge, at the NCIS field office in Washington D.C. "NCIS will continue to aggressively investigate these criminal cases in order to prevent any defective material from entering the Department of Defense supply system."

According to a study by the U.S. Department of Commerce, Bureau of Industry and Security, the number of counterfeit incidents reported by 387 survey participants climbed from 3,868 in 2005 to 9,356 in 2008, an increase of more than 140 percent.